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Three Waves of Change: SaaS Beyond the Tipping–Point

Executive Summary


May 3, 2007

Three Waves of Change: SaaS Beyond the Tipping-Point

TABLE OF CONTENTS

Introduction: Waves of Change for IT and Business

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Key Research Highlights, Insights and Strategic Planning Positions 2 Strategic Planning Positions (SPPs) SaaS Adoption SaaS Drivers SaaS Solutions SaaS Waves I,II, and III SaaS Integration Platforms, Ecosystems, Marketplaces, and Business Services Three Waves of SaaS Evolution Wave I: 2001 - 2006 SaaS 1.0, Cost-Effective Software Delivery Wave II: 2005 - 2010 SaaS 2.0, Integrated Business Solutions Wave III: 2008 - 2014 SaaS 2.0 and Beyond, Workflow-enabled Business Transformation

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SaaS in the Mainstream Normalized Acquisitions Practices and Processes

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SaaS Integration Platforms Layers of the SaaS Integration Stack

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SaaS Ecosystems and Marketplaces SaaS Ecosystem Types

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The Shift to Business Services SaaS and BPO

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Conclusion: More Substantial Change to Come

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Appendix Saugatuck Research Methodology Survey Demographics

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About Saugatuck Technology Lead Authors Mark A. Koenig mark.koenig@saugatech.com Michael G. West mike.west@saugatech.com Co-Authors William S. McNee bill.mcnee@saugatech.com Bruce T. Guptill bruce.guptill@saugatech.com.

Saugatuck provides research-based consulting and subscription research services that combine business planning and market assessment with first-hand research of executive technology buyer trends. Founded in 1999, Saugatuck is headquartered in Westport, CT. For more information, visit www.saugatech.com or call 203.454.3900 This Saugatuck Research Report can be found at http://www.saugatech.com/342order.htm. We encourage all readers to take advantage of our broader Research Library, where the full spectrum of our published research is available http://www.saugatech.com/researchbytopic.htm. Entire contents Š 2007 Saugatuck Technology Inc. All rights are reserved. Reproduction of this publication in any form without prior written permission is strictly prohibited.

Š 2007 Saugatuck Technology Inc.

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May 3, 2007

Three Waves of Change: SaaS Beyond the Tipping-Point

TABLE OF FIGURES

Figure 1: Waves of SaaS Evolution

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Figure 2: Profiling Three Waves of SaaS Evolution

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Figure 3: SaaS Usage Plans - 2006 vs. 2007

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Figure 4: SaaS Application Deployment Plans

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Figure 5: SaaS Usage Plans by Company Size - 2006 vs. 2007

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Figure 6: SaaS Acquisition Practices

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Figure 7: The SaaS Integration Platform Stack

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Sidebar: SOA and SaaS: ESBs and X-ESBs

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Figure 8: The X-ESB: Integrating SaaS with the SOA Enterprise

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Figure 9: Sample Vertical SaaS Ecosystem for Government

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Figure 10: Five Types of SaaS Ecosystems

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Figure 11: SaaS Ecosystems Examples

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Figure 12: Top Business Considerations in SaaS Provider Decisions

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Figure 13: The Business Services Continuum

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About this Report This independent research report was developed between January 2007 and April 2007 by Saugatuck Technology Inc., who is solely responsible for the content of this report. Unless otherwise cited, all content, including illustrations, research, conclusions, assertions and positions contained in this report were developed by, and are the sole property of, Saugatuck Technology Inc. Mike West and Mark Koenig led the development of this report, co-authored by Saugatuck Technology colleagues Bruce Guptill and William S. McNee. We especially want to thank the fifteen senior business and IT executives who contributed to this analysis through their participation in executive interviews. We also want to thank the more than thirty SaaS and traditional software vendors, and services providers, who participated in briefings with Saugatuck. The interviews and briefings provided valuable insights relative to the realities of SaaS today, and where it is going tomorrow. Several also contributed useful documentation concerning best practices that helped shape our research. Adobe ADP Akamai Ariba Business Objects Coradiant CORESense EMC

Fiberlink IBM Informatica Infosys Intacct Jamcracker Ketera Lucidera

Microsoft NetSuite Nimaya OpSource OutlookSoft Pragmatech Progress Software Prolifiq Software

RightNow Technologies Salesforce Symantec WebEx Workday Xactly Xora

Several other leading vendors were contacted to participate in this research, but due to the timing of upcoming announcements or other relevant reasons, elected not to participate.

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May 3, 2007

Three Waves of Change: SaaS Beyond the Tipping-Point

INTRODUCTION: WAVES OF CHANGE FOR IT AND BUSINESS The issue of whether SaaS is truly a core disruptive technology and business services phenomenon is no longer in doubt. SaaS is now a basic fact of life in IT and in business. Already SaaS has moved from simple to sophisticated – and from a departmental adjunct, to becoming a fundamental part of business and IT infrastructure and operations. Whereas SaaS was once an architectural anomaly and something deployed at “the edge,” the focus is now on delivering integrated services, as SaaS becomes a mainstream reality. It becomes clearer every day that SaaS has set in motion forces that will inexorably change business for users and IT vendors – and not just software vendors – in enterprises of all sizes, and across all industries and geographies worldwide. While North America clearly leads the world in SaaS adoption today, Europe is currently poised for rapid growth, and accelerating SaaS interest and activity in Asia is just now on the horizon. However, contrary to current market wisdom, SaaS is not going to change everything at once, or in the same way or at the same pace in these varied market segments. Each has its own characteristic needs, demand drivers and inhibitors. Each has its own technology platforms, integration, customization and personalization issues. The broad-based phenomenon that is SaaS is sweeping across all these market segments, addressing each one in its own way. Saugatuck sees SaaS progressing through three major waves of change, driven by increasingly sophisticated user demands, by rapidly evolving platforms and solutions, and by the effects of SaaS on user business organizations, structures and operations. These changes have already begun to reverberate back through the software, services and hardware markets, fundamentally changing the business organizations, structures and operations of IT vendors as well. The real questions are when, and how, these changes will take place. To determine the answers, Saugatuck conducted surveys of 250 business and IT users, deep-dive interviews with senior executives at 15 leading-edge SaaS adopters, and briefings with more than 30 SaaS providers to unlock the secrets of SaaS evolution. (Details regarding the research program can be found in Appendix A of this report.) The results are summarized in this report, including: •

The industry’s first, comprehensive roadmap of SaaS classification and evolution - Saugatuck’s three-wave SaaS evolution framework;

An examination of the most influential market phenomena – SaaS Integration Platforms (SIPs), SaaS ecosystems, and the shift toward business services – to emerge within that framework; and

A determination of what to expect and what to do – including the effects of user and vendor business transformation resulting from waves of SaaS evolution.

© 2007 Saugatuck Technology Inc.

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May 3, 2007

Three Waves of Change: SaaS Beyond the Tipping-Point

Throughout, we include Saugatuck Strategic Planning Positions (SPPs), discuss the implications of these trends for business and IT users and IT vendors alike, and provide guidance to all three parties to help navigate the increasingly turbulent waves of the SaaS ocean. The net impact of SaaS on user and vendor business will be known only over time. But those organizations that best understand and plan for SaaS and its impact, will be the ones that gain the greatest business advantage from SaaS.

KEY RESEARCH HIGHLIGHTS, INSIGHTS PLANNING POSITIONS

AND

STRATEGIC

This report contains research, analysis and insights based on Saugatuck surveys, interviews and briefings – combined with Saugatuck thought leadership frameworks developed to describe the evolution of SaaS, and key constructs that will help shape its future. The research is presented throughout this report to illustrate and emphasize what Saugatuck sees as the key changes brought by SaaS on user and vendor business over the next several years. Saugatuck research indicates three distinct and over-lapping waves of SaaS adoption and usage: •

Wave I: Early Adoption, characterized by cost-effective software delivery,

Wave II: Mainstream Adoption, characterized by the growth of integrated business solutions, and

Wave III: Ubiquitous Adoption, characterized by the growth of workflow-enabled business transformation.

The Early Adoption wave spanned the period from 2001 – 2006, and was characterized by standalone, multi-tenant application services with limited configurability, and extract-and-populate integration capabilities. Adoption was driven by a buyer focus on total cost of ownership and rapid deployment. Business users, rather than IT organizations, acquired SaaS 1.0 solutions to meet their line-ofbusiness needs. Saugatuck believes that the SaaS 2.0 “tipping-point” occurred in the latter half of 2006, at which time SaaS solutions and their buyers moved deeper into the Mainstream Adoption wave, which began in 2005 and will continue through 2010. Mainstream Adoption is characterized by SaaS business solutions increasingly integrated with on-premise applications in the IT business portfolio, the emergence of SaaS Integration Platforms (SIPs) enabling not only business portfolio integration, but also SaaS ecosystems and business marketplaces. These SaaS 2.0 solutions are characterized by increasing customization capabilities at the user interface, data structure and process layer, and the introduction of web services APIs. Ubiquitous Adoption, beginning in 2008 and continuing through 2014, ushers in a wave of workflow-enabled business transformation, optimized business and IT ecosystems, inter-enterprise collaboration, maturation of the IT utility and of SaaS infrastructure providers. This focus on business transformation will be enabled by customized and personalized business workflow, integrating in-the-cloud SaaS solutions with onpremise business services in a services-oriented architecture (SOA).

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May 3, 2007

Three Waves of Change: SaaS Beyond the Tipping-Point

Strategic Planning Positions (SPPs): Based on our research and analysis, Saugatuck has developed a series of Strategic Planning Positions (SPPs). These are key assumptions and expectations regarding SaaS technologies, offerings, adoption, usage, and effects that should be considered by user and vendor executives responsible for strategic planning and execution. Saas Adoption • • • • •

By 2010, at least 65 percent of businesses will have deployed at least one SaaS application – with the US achieving an even higher penetration in excess of 75 percent. By 2010, SaaS will be woven into the fabric of enterprise architecture, as buyers become increasingly comfortable with acquiring SaaS solutions as part of their broader business services portfolio. SaaS usage within mid-size and large enterprises will more than double by 2010 – averaging more than 7 SaaS solutions in production. Through 2010, spending on SaaS will grow at a 25 percent or greater compound annual growth rate. By 2012, 30 percent or more of all new business software will be deployed and delivered as SaaS.

SaaS Drivers •

The rising emphasis on simplifying software management and improving service levels, combined with a growing focus on security-as-a-service, signal an important shift in customer priorities that will accelerate mission critical SaaS adoption. The ultimate winners in the race to dominate the market for complex, large enterprise SaaS will be vendors who provide the ability to customize SaaS business workflows and integrate them with enterprise business processes.

SaaS Solutions • •

While Collaboration and CRM / SFA will remain leading SaaS solutions through 2008, SaaS adoption will be broad and deep across ALL major business solution categories. Barriers to mission-critical use of SaaS (integration, security, SLAs) will largely be resolved by YE2008, with purchases of core ERP, supply chain and vertical solutions accelerating across all customer segments 2009 - 2012.

SaaS Waves I, II and III •

• • •

The focus of SaaS shifts over time from cost-effective delivery of stand-alone application services (Wave I), to integrated business solutions enabled by web services APIs and Enterprise Services Busses (ESBs) (Wave II), to workflow- and collaboration-enabled business transformation (Wave III). By 2012, 40 percent of enterprises will achieve integration of cloud based solutions with on-premise services through ESBs, X-ESBs and SIPs. By 2010, simple configuration will give way to deeper and richer customization requirements at the user interface, data structure, process and workflow layers. By 2008, SaaS appliances will become a significant new form factor for IT infrastructure and application deployment services.

SaaS Integration Platforms, Ecosystems, Marketplaces, and Business Services •

• • • •

While four or five fully-integrated and dominant SIP stacks emerge by 2008, providing critically important integration, application sharing, delivery and management services – 50 percent or more of deployed SIPs will be based on complementary partnerships that combine layers to provide the full stack. Through 2010, pure-play SaaS brands will drive market adoption of business services marketplaces; however, by 2014 the long term winners will be large business and consumer brands powered by SIPs. Through 2008, SaaS ecosystems and marketplaces will differentiate through business intelligence / analytics, content management and mobility solutions. By 2008, a new SaaS business services provisioning model emerges, combining pure-play SaaS solutions with business services from both next-generation and traditional managed services and BPO providers. While many SaaS vendors desire to remain pure-play application solution providers, customer requirements (rather than Wall-street valuation metrics) will determine how far into business services they must go to effectively compete and win.

© 2007 Saugatuck Technology Inc.

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May 3, 2007

Three Waves of Change: SaaS Beyond the Tipping-Point

A PPENDIX Saugatuck Research Methodology Saugatuck conducts primary research survey, briefing and interview programs as an integral part of our IT market and strategy consultancy practice. Since 2002, Saugatuck has performed a series of user executive and vendor executive research programs, including web-based surveys, telephone interviews, and briefings, on the most disruptive and influential IT developments in the marketplace: The IT Utility, Services-Oriented Architectures, Software-as-a-Service, and Open Source. In addition, Saugatuck annually surveys more than 500 business and IT executives as part of its annual user C-Team and IT Insights and Trends research program. Our first SaaS-specific user executive survey and vendor interview/briefing program was executed in early 2006, with our analysis published in the April 2006 ground-breaking report, SaaS 2.0: Software-as-a-Service As Next-Gen Business Platform (SSR-239, 26Apr06). This report represents key analysis and insights developed from our second such research program, executed early in 2007. This latest program included a web survey of 250 user enterprise executives; interviews with 15 user enterprise executives with SaaS 2.0 experience; and briefings with 31 SaaS vendors/providers.

Survey Demographics The core data for this report were developed from Saugatuck’s SaaS 2.0 web survey program, conducted from November 2006 through March 2007. A total of 250 qualified respondents were included. These survey participants are classified as follows: By Revenue: Revenue

Percent

Less than $250 million

30%

$250 million to $1 billion

26%

$1 billion to $5 billion

18%

$5 billion to $10 billion

9%

More than $10 billion

17%

By Region: Region

Percent

North America

51%

Western Europe

32%

Asia / Pac

14%

Rest of World

3%

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May 3, 2007

Three Waves of Change: SaaS Beyond the Tipping-Point

By Function: Function

Percent

Information Technology

42%

Finance & Operations

17%

General Management

16%

Sales & Marketing

13%

Strategy

9%

Other

4%

By Industry: Industry

Percent

Manufacturing

13%

Business Services

13%

Hi-Tech

12%

Financial Services

10%

Government / Education

10%

Pharma / Healthcare

8%

Telecom

5%

CPG / Retail

5%

Publishing / Media

3%

Energy

2%

Transportation

2%

Other

17%

By Title: Title

Percent

CxO (i.e. CEO, CFO, COO, CIO, CMO)

32%

Vice President

13%

Director

30%

Manager & Other

25%

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SAUGATUCK OFFERINGS AND SERVICES Saugatuck Technology is a strategic advisor to senior executives, information technology vendors and investors, providing strategy consulting, subscription research and thought-leadership programs focused on emerging technologies, key business / IT challenges, and effective management strategies. STRATEGIC CONSULTING SERVICES •

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Three Waves of Change: SaaS Beyond Tipping-Point